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Weaker dollar a boon for Poloz, economist says

The Canadian dollar is at abou the 91-cent US range thanks in part to Bank of Canada governor Stehen Poloz’s dovish comments, as well as signs of a strengthening U.S. economy.

Photograph by: Ryan Remiorz
, THE CANADIAN PRESS

OTTAWA — Stephen Poloz is facing his biggest test since taking the reins at the Bank of Canada nearly eight months ago: balancing concerns over a sluggish economy and dormant inflation against equally troubling household debt and a housing market that refuses to cool off.

But with a drop in mortgage rates by the Royal Bank, and other commercial lenders expected to follow, Poloz has another reason not to consider lowering the bank’s trendsetting rate — as many economists have conceded is a possibility — and encouraging even more excessive consumer borrowing.

Another reason, as well, is the positive effect on the economy of a weakening Canadian dollar.

The dollar is trading at about the 91-cent US range, the lowest since late 2009, thanks in part to Poloz’s dovish comments, as well as signs of a strengthening U.S. economy.

That weaker dollar should help exporters and manufacturers by increasing sales competitiveness in the U.S. On the flip side, it will make purchases outside Canada more expensive, and that should bump inflation levels here.

The interest rate statement Wednesday “will try to be as dovish as possible, stopping short of signalling potential cuts.”

The rate decision will be accompanied by the Bank of Canada’s closely watched Monetary Policy Report, a quarterly outlook on the domestic and global economies.

The report will likely provide a fresh forecast on inflation, among other adjustments. “The bank’s biggest concern is persistently low inflation, and we expect that will be stressed even more firmly in the statement and the MPR inflation forecast will be downgraded,” Reitzes said.

Poloz, 58, adopted a neutral position on rates on Oct. 23, the same day as the previous MPR was issued, dropping all guidance on the direction of borrowing costs.

“There isn’t anything wrong with guidance,” Poloz said in a recent interview, “[but] if it’s used all the time, it’s just our conclusion of all the analysis we have. Anyone else can figure out what that conclusion is. We said what is was, we’re not changing interest rates.”

The central bank’s overnight lending rate — a target for borrowing levels between financial institutions — has languished at a lowly one per cent since September 2010. The guidance provided previously under Mr. Poloz, and Mark Carney before him, was that rates would eventually rise, a not-so-veiled warning that consumers should avoid piling on debt they might not be able to afford down the road.

“Our base case remains that the BoC will likely remain on hold until the first half of 2015,” Charles St-Arnaud, a Nomura Securities economist, said in a note to investors.

“However, because of the concerns of weak inflation, we believe there is a 30-per-cent likelihood the BoC may cut rates over the next six months. As a result, we see a small possibility the BoC may signal some willingness to lower rates in coming meetings.”

The next reading on inflation will come Friday, when Statistics Canada releases its consumer price index for December, likely showing more of the same weakness as the previous month, when annual price gains were limited to 0.9 per cent, below the Bank of Canada’s target range of 1-3 per cent.

“November marked the 7th time in the last 13 months in which the CPI increased less than one per cent on a year-over-year basis,” the federal data agency noted.

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